Inside Yahoo: Less Show, More Sell

New CEO Aims to Reduce Emphasis on Ads, Boost Commission Revenue

By

Amir Efrati

February 9, 2012

New Chief Executive Scott Thompson's plan for turning around Yahoo Inc. is beginning to take shape: He wants to push the Internet company away from its advertising roots and get more of its revenue from fees and commissions, according to people familiar with the matter.

The 54-year-old executive, who was hired last month, hasn't mentioned specifics during meetings with employees and business associates.

He has made clear, however, that Yahoo's nearly single-minded focus on its existing websites and online-advertising sales hasn't worked, and that the "market" places little value on the company's core online-ad business, these people said.

Yahoo's online-ad sales have been flat in recent years while those of rivals like Facebook Inc. and Google Inc. have charged ahead.

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Scott Thompson
Anastasia Vasilakis

In the past few weeks, Mr. Thompson has held intimate lunches and large-scale gatherings with Yahoo employees in which he has told attendees that he plans to divert more time and resources to Web services aimed at capturing future revenue, rather than trying to manage the profit margins of the company's current services, the people said.

Mr. Thompson hasn't ignored the online-ad business entirely. He has met with several top executives of Yahoo's major advertising-agency partners since his tenure began, people familiar with the matter said.

He appeared to make a minor gaffe last month during a brief appearance at a regularly scheduled meeting between Yahoo executives and one such ad agency, Interpublic Group of Cos., which controls hundreds of millions of dollars in digital-ad spending by big marketers.

When asked for his views about ad agencies, he said he prefers to be "as close to the customer as possible," and that "I don't like intermediaries that add no value," the people familiar with the matter said.

While Mr. Thompson added that good intermediaries "can change the equation," his comments surprised some attendees because ad agencies have previously clashed with Yahoo and other Internet companies that have tried to work directly with marketers, effectively cutting them out, these people said.

A spokeswoman for Yahoo declined to comment or to make Mr. Thompson available for comment. An Interpublic Group spokesman didn't respond to requests for comment.

While Mr. Thompson's tenure at Yahoo remains in its early days, his remarks provide clues as to the direction that he plans to take the company.

The executive, who was previously president of eBay Inc.'s PayPal unit and has no online-ad experience, faces an enormous task in trying to make Yahoo relevant again.

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Some Yahoo employees, however, said they have been encouraged by Mr. Thompson's words and enthusiasm for changing the company.

His predecessor, former CEO Carol Bartz, was fired late last year after failing to rev up Yahoo's revenues. The company has since explored a sale of all or parts of itself and has revamped its board.

On Tuesday, Yahoo Chairman Roy Bostock said he was stepping down, along with three other board members; last month Yahoo co-founder Jerry Yang resigned from the board.

Looking beyond Yahoo's online-ad business might not produce quick results for the Sunnyvale, Calif., company. In 2011, it derived $3.4 billion, or 78% of its net revenue, from online ads.

Yahoo also generated nearly $1 billion from transaction-related fees on its auto, travel, shopping and other sites, where it takes a commission from the sale of products or services. Profit margins in e-commerce tend to be lower than those for online ads.

Mr. Thompson appears to have set his sights on non-ad revenue sources early on. Last month, he said publicly that he plans to exploit the data that Yahoo has collected on the hundreds of millions of people who visit its email, news, sports, and other websites every month.

Such information is the "single most underrated, underappreciated and underused asset" at the company, he said in a conference call with analysts.

Sameet Sinha, an Internet analyst at B. Riley & Co., said one way for Yahoo to get closer to people's "purchase decisions" and take a cut of transactions would be to acquire a company such as Bankrate Inc.,RATE0.55% which helps consumers find mortgages or other investments; Angie's List Inc.,ANGI4.17% which publishes reviews of contractors, doctors and other service providers; Yelp Inc., which also provides information on local businesses; or Trulia Inc., which helps people search for real estate.

Among his other efforts, Mr. Thompson has invited private-equity firms Silver Lake Partners and TPG—which had expressed interest in taking a minority stake in Yahoo—as well as McKinsey & Co. and Boston Consulting Group, to company headquarters to hear their views about the company's direction, said a person familiar with the matter.

Representatives of Silver Lake, TPG, McKinsey and BCG all declined to comment.

Mr. Thompson may shake up Yahoo in other ways. He is considering potential candidates to join his executive team.

And he has indicated that the company could make layoffs, people familiar with the matter said. Yahoo had 14,100 employees at the end of 2011, up 4% from a year earlier, though it has weathered years of brain drain.

As he digs into the company, Mr. Thompson may have to make some more tough decisions.

People familiar with the situation said he is evaluating whether to continue buying up advertising-technology companies to compete with Google in selling graphical online ads through automated systems, a field in which Yahoo has lagged behind.

Mr. Thompson and Yahoo's board also are continuing to grapple with Yahoo's valuable stakes in two Asian companies, Alibaba Group Holding Ltd. of China and Yahoo Japan,46897.10% and are negotiating with its partners in those companies to shed some of its holdings as part of a complex asset-swap deal valued at roughly $17 billion, people familiar with the matter have said.

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